FEDERAL COURT OF AUSTRALIA Flexible Manufacturing Systems Pty Ltd v Fernandez [2003] FCA 1491 RECEIVERS – monies retained by former receiver – whether lien exists where costs and expenses allegedly foreseeable but not incurred prior to termination of receivership Corporations Act 2001 (Cth) ss 598, 1321 Hill v Venning (1979) 4 ACL 555 cited Dyson v Peat [1917] 1 Ch 99 applied O'Donovan, Company Receivers and Administrators, Law Book Co, 1992 par 12.650 FLEXIBLE MANUFACTURING SYSTEMS PTY LTD & ANOR v AVITUS THOMAS FERNANDEZ V3130 of 2003 HEEREY J 18 DECEMBER 2003 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V3130 OF 2003 BETWEEN: FLEXIBLE MANUFACTURING SYSTEMS PTY LTD (subject to Deed of Company Arrangement) ACN 006 074 675 and KENNETH WAYNE LAMB (in his capacity as Deed Administrator) APPLICANTS AND: AVITUS THOMAS FERNANDEZ RESPONDENT JUDGE: HEEREY J DATE OF ORDER: 18 DECEMBER 2003 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The respondent pay to the first respondent $58,091.18 together with interest thereon at the rate of 11 per cent from 12 March 1999 until payment. 2. The respondent pay the applicants' costs of the application, including reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V3130 OF 2003 BETWEEN: FLEXIBLE MANUFACTURING SYSTEMS PTY LTD (subject to Deed of Company Arrangement) ACN 006 074 675 and KENNETH WAYNE LAMB (in his capacity as Deed Administrator) APPLICANTS AND: AVITUS THOMAS FERNANDEZ RESPONDENT JUDGE: HEEREY J DATE: 18 DECEMBER 2003 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 The applicants Flexible Manufacturing Systems Pty Ltd (subject to Deed of Company Arrangement) ("FMS") and its Deed Administrator Kenneth Wayne Lamb have brought an application under ss 598 and 1321 of the Corporations Act 2001 (Cth) ("the Act"). The applicants seek orders that the respondent Avitus Thomas Fernandez, formerly a receiver and manager of FMS, pay to FMS the sum of $58,091.18 said to be held in trust for that company together with interest thereon at the rate of 11 per cent from 12 March 1999. 2 The respondent resists the claim by asserting an equitable lien in respect of costs and expenses incurred in connection with certain litigation. The legal question which arises is whether a lien can be enforced in respect of costs and expenses of a receiver incurred after termination of appointment if, arguably at least, they were foreseeable prior to termination. 3 On 5 May 1992 the respondent, along with another gentleman who subsequently resigned, was appointed receiver and manager of FMS by WRS Investments Pty Ltd, Royce Ritchie & Associates Pty Ltd and Royce Bruce Ritchie ("the mortgagees") pursuant to a registered debenture charge. On the same day the mortgagees entered into a deed of indemnity which included the following provisions: "1. The mortgagees hereby covenants that it will indemnify and keep indemnified the receivers and their legal personal representatives against all claims demands, actins, costs, charges and expenses or other liabilities whatsoever that many (sic) be brought, suffered, sustained or incurred by the receivers arising out of or in connection with the receivership and management of the mortgagor. 2. The mortgagees hereby covenants that it will pay and be responsible for the payment to the receivers and their legal personal representatives of all remuneration, commission, charges, costs, fees and expenses payable or to become payable to the receivers pursuant to the Debenture in relation to their acting as receivers and managers as aforesaid to the extent that the assets charged by the Debenture to which the receivers have been appointed prove insufficient to discharge such remuneration." 4 During the course of his receivership the respondent conducted litigation in the United States which resulted in a net recovery of $2,741,087. He repaid to the mortgagees amounts totalling $2,391,336. As at 2 May 2003 there remained a deficiency under the debenture of $999,158, or alternatively $375,716 depending on which of two interest rates were adopted. 5 In March 1999 the mortgagees proposed the commencement of proceedings in the name of FMS against the State Bank of New South Wales. The applicable limitations period was due to expire on 17 March 1999. The respondent was reluctant to embark on this litigation because of the expense involved. 6 On 4 March 1999 Mr Royce Ritchie on behalf of himself and the other mortgagees wrote to the respondent stating that he would "like to put in train arrangements for finalising the receivership". Mr Ritchie said that he believed it to be in the mutual interest of the respondent and the mortgagees "to complete the receivership as soon as possible whilst contingencies are negligible". 7 On 12 March 1999 Mr Ritchie wrote again suggesting the receivership be terminated by close of business on 15 March and requesting transfer of the funds held by the respondent to the new bank account of FMS. On the same day the respondent replied forwarding the notice of cessation (Form 505) and advising that he would proceed to finalise the receivership accounts. 8 On 16 March 1999 Mr Ritchie wrote to the respondent referring to a fax of 15 March 1999 (apparently not in evidence) and a transfer of $150,000 to the FMS bank account. Mr Ritchie asserted that the amount required to be transferred was $264,590 plus interest to date, or that amount less an outstanding account from PA Somerset & Co for $26,608.85. Legal action was threatened. 9 On 17 March 1999 the respondent wrote to Mr Ritchie claiming to confirm a conversation on 12 March in which the respondent had said, amongst other things, that the "final resolution would include addressing any and all outstanding costs and expenses of the receivership and the contingent liability to Price Waterhouse in the United States as against the funds of the Company/Receivership" still held by US lawyers. It was stated that Mr Ritchie's earlier proposals regarding the funds in the US had not been agreed to by the respondent. The letter concluded: "Royce[,] as previously indicated it is normal practice for a Receiver & Manager to hold on to sufficient funds for the purposes of finalisation, particularly where there are unsatisfied liabilities of the receivership or if there are contingent liabilities, and until those maters are resolved. I also indicated that the outstanding matters, I feel, are capable of resolution without major concern – the principal matters to be resolved in this regard relate to the Price Waterhouse matter in the US and the outstanding costs and expenses of the receivership. I will contact you early next week regarding the finalisation of the above however should you have any further queries or comments please advise." 10 On 17 March 1999 Charles Fice, solicitors, wrote to the respondent on behalf of the mortgagees and FMS demanding payment of the balance of funds held by him. 11 Some discussions then took place and on 25 March 1999 Trumble Szanto Lawyers on behalf of the respondent forwarded to Charles Fice a draft deed which in effect provided that * the deed of indemnity should continue despite the resignation from receivership of the respondent * the mortgagees acknowledge that they indemnify Mr Fernandez "in relation to any claims which may be made in respect of litigation conducted by or involving" FMS presently or whilst in receivership "and specifically any claims for payment of fees, expenses, costs, charges or any amount howsoever claimed by Wrenn Wille and Gregory [US lawyers] or by Price Waterhouse in respect of such litigation * the mortgagees release the respondent from any claims in relation to fees rendered by him for his services or the services of his agents in relation to the conduct of the receivership and the termination of the receivership and in relation to conduct of any litigation involving FMS during the term of the receivership. 12 There is no evidence as to the response of the mortgagees or FMS to the draft deed. However on 31 March 1999 the respondent paid a further $30,000 to the FMS account. 13 On 10 June 1999 Trumble Szanto wrote to Charles Fice stating that their client had attempted to make contact with Mr Ritchie but without success. They requested Charles Fice to ask Mr Ritchie to contact the respondent to arrange a meeting to finalise the receivership accounts. Charles Fice replied on the same day advising that they had done as requested. However Mr Ritchie did not respond and nothing happened for about a year. 14 In June 2000 the respondent received a subpoena to attend before the Supreme Court of New South Wales on 19 June 2000 and produce certain documents. The subpoena was issued in proceeding No 2268 of 2000 in the Equity Division. The plaintiffs Parkard Computers Pty Ltd and Barry Charles Amor alleged that they had been oppressed as minority shareholders of FMS and that, inter alia, Mr Ritchie, who was named as a defendant, had instructed the respondent to make excessive distributions to the mortgagees. 15 In August 2000 Philips Fox, the solicitors for the plaintiffs in the Equity Division proceeding, advised the respondent he might be joined as a defendant. 16 On a date which does not emerge clearly from the evidence the respondent was in fact joined as a defendant in the Equity Division proceeding. He was served with an amended statement of claim on 26 September 2000. He sought to have the defendants' solicitors act for him. On 3 October 2000 Mr Ritchie wrote to him rejecting that proposal and asserting that there had not been a final reconciliation of accounts nor payment of outstanding monies consequent upon the cessation of the receivership. Return of the funds was demanded. 17 On 4 October 2000 Trumble Szanto wrote to the defendants' solicitors again proposing that the latter should act for the respondent. The letter stated that if no agreement were reached the respondent would have no alternative but to seek independent representation, in which event he would seek to recover his costs under the deed of indemnity. 18 The respondent notified his insurer and the insurer instructed Henry Davis York solicitors to act on his behalf in the Equity Division proceeding. 19 The respondent engaged Trumble Szanto to advise him in relation to his defence. On two occasions he travelled to Sydney with a partner of that firm to confer with Henry Davis York and counsel instructed by them. Since there was, as far as the evidence shows, no suggestion of the respondent's insurer refusing indemnity, it is not clear why he felt he needed separate representation. In any event, the respondent says he was required to spend considerable time and effort, especially in relation to discovery. 20 Ultimately in late June or early July 2003 the Equity Division proceeding was settled. 21 In the meantime Mr Lamb was appointed administrator of FMS on 11 November 2002. On the following day Mr Lamb wrote to the respondent alleging he was withholding approximately $30,000 of the company's funds. The letter stated: "If there are any outstanding issues in relation to your Receivership you are entitled to rely on the indemnity provided by the secured creditor/s, if it is enforceable, however you are not entitled to withhold the funds from the above named company." 22 On 3 June 2003 Charles Fice wrote to Trumble Szanto asserting that there was no dispute that the respondent had retained the sum of $58,1350, the property of FMS, in his trust account. Immediate payment was demanded. Trumble Szanto subsequently made a proposal "without prejudice except as to costs". This was not accepted. The present application was filed on 11 June 2003. 23 On 20 October 2003 the respondent commenced an action in the County Court of Victoria No C1-03-08423 against the mortgagees seeking "damages and/or compensation" in the sum of $47,250.71 pursuant to the deed of indemnity. This claim was said to be for the respondent's "reasonable remuneration and fees by reason of his work as receiver and manager" of FMS and "by reason of his being involved in and defending" the Equity Division proceeding and the present application. 24 The present application was on 10 September 2003 adjourned until 23 October 2003. The adjournment was at the request of the respondent to enable him to examine records held by Henry Davis York. There was also an order for a mediation, which was subsequently conducted but without success. 25 Before the adjourned hearing the respondent swore an affidavit on 22 October 2003. He deposed that since the previous hearing he had received his files which had been in the possession of Henry Davis York. He exhibited various correspondence and continued as follows: "I confirm that I was on notice and was concerned that I may be joined to proceedings in the Supreme Court of New South Wales based on the allegation made by Mr Amor and by Phillips Fox as his lawyers, that payments which had been paid by me as Receiver to the debenture holders, or as directed by the debenture holders, could be challenged as having been not properly payable or not properly authorised. This possibility in fact occurred upon my joinder to the New South Wales proceedings referred to in my affidavit sworn on July 11, 2003. I was also concerned that the indemnity provided by Royce B Ritchie to Wrenn, Wille, Gregory and Lundeen may have proven to be insufficient and accordingly it was appropriate that I retained funds in the eventuality of a claim being made pursuant to that indemnity." 26 An examination of the correspondence does not bear out the respondent's assertion. I can discern no threat prior to the termination of the receivership that the respondent might be sued personally. Had such a threat been made, the probability is that the respondent would have raised it with Mr Ritchie at the time of termination of the receivership. The US litigation is not now an issue. 27 In my opinion, the respondent is not entitled to the lien claimed. True it is that even after termination of receivership receivers have a lien on the assets in their hands against all proper liabilities for which they are personally liable: O'Donovan, Company Receivers and Administrators, par 12.650; Hill v Venning (1979) 4 ACL 555. However, as O'Donovan points out (loc cit, footnote 7) the lien does not cover contingent, as distinct from actual, liabilities. The authority for the last-mentioned proposition is Dyson v Peat [1917] 1 Ch 99. A receiver sought to maintain a lien to indemnify him against possible claims for damage to the surface of land above a colliery which he had worked. The reasoning of Eve J at 103-104 is instructive: "In the case of Hammonds v. Barclay 2 East 227,235, cited by Mr. Clayton in the course of argument, there happens to be in the judgment of Grose J. a definition of a lien which it is convenient to quote. He says: 'A lien is a right in one man to retain that which is in his possession belonging to another, till certain demands of him the person in possession are satisfied.' It is clear that no liability has yet accrued here, and it is admitted that no cause of action on the part of any surface owner has yet arisen. There has been no payment made by the defendant on behalf of the plaintiffs, no demand has been made upon him, and so far as is known there is no liability ripening against him. In these circumstances it is impossible to suggest that he has any lien at law. Has he then any equitable lien? I am of opinion that he has not either upon principle or authority. If any principle existed under which a lien could be asserted in cases of this sort it would lead to very extra-ordinary results. A receiver appointed by a mortgagee to execute work of this nature, involving the excavation of strata underlying the earth's surface, always runs some risk, however careful he may be in performing his duties, and his operations are calculated to create a state of things which at some distant date may give rise to a cause of action. Whey then, if he is entitled to assert a lien on his receipts for any possible future claim which may be made against him, should he part with a single halfpenny of his receipts? He would certainly have a better claim to assert a lien on these than on other moneys of his principal which have reached his hands from another source and are not the fruit of his work as agent. But the result of holding him entitled to assert such a lien over his receipts would be to paralyse his activities as the principal's agent and, in a case like the present where the main and practical object of his appointment is the getting and marketing of the coal, would be destructive of the advantages intended to be secured by the appointment. When this is once realized it is not to be wondered at that no authority has been produced in support of the defendant's claim. In my opinion it cannot be sustained, and I must declare that the defendant is not entitled to retain, as against the plaintiffs any part of these investments, and that the plaintiffs are entitled to have them transferred to their names." 28 The validity of the lien has to be assessed as at the termination of the receivership. If there was then no lien, the respondent was obliged to hand over the funds to the mortgagees or pay it at their direction to FMS. Since there was at best a contingent claim, the respondent was not entitled to retain the funds. Mr Lamb was correct in pointing out (see [21] above) that if there were any outstanding issues the respondent could rely on his indemnity, as he is now doing in his County Court proceeding. 29 By an "interlocutory application" filed on 22 October 2003 the respondent sought (i) an order fixing the amount to be paid to him by way of remuneration for the period 10 March 1999 to the date of making any order in relation to the respondent's appointment as receiver and manager of the property of FMS pursuant to the deed of appointment dated 5 May 1992 and (ii) an order relieving him from liability in respect of any negligence, default, breach of trust or breach of duty, in his capacity as receiver and manager of FMS. 30 Neither order is appropriate. The respondent's remuneration is now a matter for the County Court. There is no proper basis for relief from liability. Once the respondent's claim for lien fails, there is no reason why he should not hand over the funds, with interest. That is the only relief the applicants seek. 31 There will be an order in terms of the application. I certify that the preceding thirty one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey . Associate: Dated: 17 December 2003 Counsel for the Applicants: J D Mattin Solicitor for the Applicants: Charles Fice Counsel for the Respondent: P Vout Solicitor for the Respondent: Trumble Szanto Lawyers Date of Hearing: 23 October 2003 Date of Judgment: 18 December 2003